‹#› 1 United States Commercial Law Seminar Masaryk University April 11-21, 2011 Lecture Four: State Law Business Torts: Unfair competition; interference with contract; interference with prospective economic advantage Joseph D. Lee Munger, Tolles & Olson LLP ‹#› 2 Readings 1.In re Tobacco II Cases, 46 Cal.4th 298 (2009) 2.Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1150 (2003) 3.Linear Technology Corp. v. Applied Materials, Inc., 152 Cal. App.4th 115 (2007) ‹#› 3 Elements of Claim for Unfair Competition pA claim for unfair competition under UCL [Bus. & Prof. Code § p17200] requires proof that defendant engaged in p pA "business" act or practice pConsisting of either: nAn "unlawful" act or practice; nA "fraudulent" act or practice; nAn "unfair" act or practice; or nUnfair or false advertising pPlaintiff must have suffered injury in fact resulting in loss of money or property > ‹#› 4 Unfair Competition Law: Key Issues pLimited to consumer cases? pUnlawful element: only violations of nStatutes nRegulations nOther written law pEquitable remedy – available if plaintiff has adequate remedy at law? pClass actions: must entire class have suffered loss of money or property? > ‹#› 5 Purpose of UCL pConsumer class actions and representative UCL actions serve important roles in the enforcement of consumers' rights. p[They] make it economically feasible to sue when individual claims are too small to justify the expense of litigation, and thereby encourage attorneys to undertake private enforcement actions. pThrough the UCL a plaintiff may obtain restitution and/or injunctive relief against unfair or unlawful practices in order to protect the public and restore to the parties in interest money or property taken by means of unfair competition. pThese actions supplement the efforts of law enforcement and regulatory agencies. p In re Tobacco II Cases, 46 Cal.4th 298 (2009) > ‹#› 6 Tobacco II case p“The complaint before us alleges that the tobacco industry defendants violated the UCL by conducting a decades-long campaign of deceptive advertising and misleading statements about nthe addictive nature of nicotine and nthe relationship between tobacco use and disease.” > ‹#› 7 Proposition 64 pAdopted by voters in 2004 pIntended to limit scope of UCL statute: nuse by unscrupulous lawyers who exploited the generous standing requirement of the UCL to file “shakedown” suits to extort money from small businesses. n“Attorneys formed a front ‘watchdog’ or ‘consumer’ organization. They scoured public records on the Internet for what [were] often ridiculously minor violations of some regulation or law by a small business, and sued that business [through] the front organization nSince even frivolous lawsuits can have economic nuisance value, the attorneys then contacted the business … and pointed out that a quick settlement (usually around a few thousand dollars) would be in the business's long-term interest.” pProvides: “Any person may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements of Section 17204” ni.e., a “person who has suffered injury in fact and has lost money or property as a result of [the] unfair competition.” > ‹#› 8 Tobacco II case: questions presented pOn review, we address two questions: pFirst, who in a UCL class action must comply with Proposition 64's standing requirements, the class representatives or all unnamed class members, in order for the class action to proceed? nWe conclude that standing requirements are applicable only to the class representatives, and not all absent class members. > ‹#› 9 Tobacco II case: questions presented pSecond, what is the causation requirement for purposes of establishing standing under the UCL? nWe conclude that a class representative proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions. > ‹#› 10 UCL Claim: Alvarez v. GE Money Bank pAllegation: unfair to give credit cards to consumers without disclosing over limit fee pDefense: fee was expressly disclosed in application pQuestion: are consumer disclosures enforceable? nWhat if it is buried in a long document that few consumers read? p > ‹#› 11 Unconscionability Issue pProcedural unconscionability – 2 elements nOppression: “inequality of bargaining power … resulting in no real negotiation and an absence of meaningful choice” nSurprise: “involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in a prolix printed form drafted by the party seeking to enforce the disputed terms.” (A&M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486) pSubstantive unconscionability nA contractual term is only substantively unconscionable if it is “so one-sided as to shock the conscience, or imposes harsh or oppressive terms.” (Morris v. Redwood Empire Bancorp (2005) 128 Cal. App. 4th 1305, 1322) > ‹#› 12 Allen v. Verizon California pClaim: Verizon violated UCL by selling Caller ID services representing that it would provide all available names nIn fact, Verizon chose not to purchase names from a handful of databases pApplied only to land lines pAllen sought to represent class of all California purchasers of Caller ID pDefenses to class certification: nMany customers not affected at all nOthers affected so seldom is was not material nImpractical to determine extent of impact on class members – requires individualized inquiry > ‹#› 13 UCL Claim Against JBC pJBC sells 100% carbon fiber bikes (road and mountain) p10% of bikes are made in China pChinese subsidiary starts using some aluminum in chainstays in 2009 pU.S. parent learns of this in 2011 and issues recall notice – 20,000 bikes affected pBob Rider, a California resident who owns a JBC bike, sues under 17200 alleging fraud nRider seeks to represent all people who bought any JBC frame after 2009 nHe also seeks, in the alternative, to represent all people who bought a Chinese frame after 2009 > ‹#› 14 Rider v. JBC: Key Questions pDoes Rider have standing at all? pCan Rider sue on behalf of all purchasers since 2009? nOr only those who bought Chinese frames? pShould JBC fight the suit? nEstimated cost: $1.5 to 2 million nDisruption of business nReputational impact nProbability of winning nSettlement options and challenges > ‹#› 15 Rider v. JBC: Plaintiff’s Settlement Demand pReplace all Chinese-made frames at distributor or through mail (20,000 x $1,000 = $20 million) pCover all mailing costs if mailed pReimburse rental costs of up to $200 per biker pAgree to inspections of Chinese facility by independent party up to twice per year pStipulate to injunction against using aluminum or other materials in any CF bike for five years pMail notice to all class members (20,000 people at cost of $2 each = $40,000) pPay Rider a $10,000 award pPay each owner of Chinese frame $500 ($10 million) pPay plaintiff’s attorneys fees of $2 million p > ‹#› 16 What do we do about China? pThey paid a bribe that caused us a big problem ($32 million) pNow they caused a 17200 suit pOptions: nShut them down? nReplace executives and country manager? nFire everyone involved? nSell off the operation? pLow price if sell now pHigher price if reform operations then sell nOther options? > ‹#› 17 Elements of Claim for Interference with Contract p A claim for intentional interference with prospective economic advantage requires proof that nPlaintiff had a valid contract with a third party nDefendant knew about the contract’s existence nDefendant's conduct was intended to interfere with the contract nDefendant in fact interfered with the contractual relationship nPlaintiff suffered actual injury pNegligent interference may also be actionable n > ‹#› 18 JBC v. Trek pJBC’s largest US distributor is Helens Bikes n42 stores in 12 states nHelens sells 40,000 JBC bikes each year pTrek offers Helens 5% price discount if >50% of bikes sold are Trek bikes nTo make 50%, Helens must sell no more than 10,000 JBC bikes per year pIn 2010, Helens sales go from 40,000 to 9,000 nJBC loses $2000 per bike: x 31,000 = $6 million nFuture losses projected at $26 million pover five years pdiscounted to present value nTotal claim: $32 million Hypothetical for discussion only – not a real fact pattern! > ‹#› 19 JBC v. Trek: Strategic Considerations pShould we sue: nHelens nTrek pRisks: nLikely cost of suit: $2-3 million pPossible contingency case pCosts higher if Trek buries us with discovery nDisruption of business nPossible trade secret cross claims (Anna) pPre-suit demand? pProbability of prevailing = 60% p p Hypothetical for discussion only – not a real fact pattern! > ‹#› 20 Elements of Claim for Interference with Prospective Economic Advantage p A claim for intentional interference with prospective economic advantage requires proof that nPlaintiff had an economic relationship with a probability of future economic benefit; nDefendant knew about plaintiff's economic relationship; nDefendant's conduct was substantially certain to interfere with plaintiff's relationship; nDefendant's conduct was independently unlawful; nDefendant disrupted plaintiff's relationship; nPlaintiff suffered actual injury p Blank v. Kirwan (1985) 39 Cal.3d 311, 330, 216 Cal. Rptr. 718 > ‹#› 21 JBC v. Gallardo Bike Co. p JBC has entered into negotiations with Kenyan government to sell 25,000 bikes over three years pValue of deal = $50 million ($2,000 x 25,000) pGallardo, an Italian manufacturer, is competing for deal nGallardo’s Kenya country manager pays $1 million in bribes to Kenyan officials nGallardo announces contract to sell 25,000 Gallardo bikes nKenya advises JBC that it has awarded contract to Gallardo pImpact on JBC nLost profits of $50 million nLost foothold in Africa (other deals): $250 million? > ‹#› 22 JBC v. Gallardo Bike Co: Key Issues pShould we pursue complaints with: nKenya government officials nU.S. embassy/State Department nCzech embassy pPossible referral to law enforcement agencies nIn Italy nIn Kenya nIn U.S. (what if Gallardo sells American Depositary Receipts on a U.S. security exchange?) pShould we sue Gallardo? nWhere can suit be brought? nWhose law applies? p p >